Private Flood Insurance Requirements

Effective July 1, 2019

The OCC, Federal Reserve, FDIC, FCA, and NCUA issued a joint final rule, effective July 1, 2019, requiring regulated institutions to accept certain private flood insurance policies in addition to the National Flood Insurance Program (NFIP) policies.

A Private flood insurance is an insurance policy that:

1.  Is issued by an insurance company that is:

• Licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or
• Recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the State or jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property;

2.  Provides flood insurance coverage that is at least as broad as the coverage provided under an SFIP (standard flood insurance policy issued under the NFIP) for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer. To be at least as broad as the coverage provided under an SFIP, the policy must, at a minimum:

• Define the term “flood” to include the events defined as a “flood” in an SFIP;
• Contain the coverage specified in an SFIP, including that relating to building property coverage; personal property coverage, if purchased by the insured mortgagor(s); other coverages; and increased cost of compliance coverage;
• Contain deductibles no higher than the specified maximum, and include similar non-applicability provisions, as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender;
• (iv) Provide coverage for direct physical loss caused by a flood and may only exclude other causes of loss that are excluded in an SFIP. Any exclusions other than those in an SFIP may pertain only to coverage that is in addition to the amount and type of coverage that could be provided by an SFIP or have the effect of providing broader coverage to the policyholder; and
• (v) Not contain conditions that narrow the coverage provided in an SFIP;

3. Includes all of the following:

• A requirement for the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to:
  • The insured; and
  • The supervised institution that made the designated loan secured by the property covered by the flood insurance, or the servicer acting on its behalf;
• Information about the availability of flood insurance coverage under the NFIP;
• A mortgage interest clause similar to the clause contained in an SFIP; and
• A provision requiring an insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy; and

4.  Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.

Rather than requiring institutions to review full policies to determine if they have all the required items, the rules allows that if the insurance policy attests to compliance with the requirements, the institution can accept that the policy meets the requirements.  The required attestation is “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

Note that investors, including government sponsored entities may require a complete and in-depth review of the a private flood insurance policy.

The Rule allows a discretionary acceptance, in which institutions may, but not required to, accept a private flood insurance policy that does not meet the above requirements, if the policy:

• Provides coverage in the amount required above;
• Is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the State or jurisdiction where the property to be insured is located;
• Covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; and
• Provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the institution’s documents its conclusion regarding sufficiency of the protection of the loan in writing.

Institutions also may, but not required to, accept plans issued by a mutual aid society in certain cases, but only after the institution’s regulator has determined that such plans qualify as flood insurance for purposes of this Rule.

The compliance professionals at CSG are not attorneys and, therefore, the services we provide should not be considered a legal opinion or other legal analysis pertaining to the information covered. We urge you to consult with your legal advisor before revising products or services or taking other action based on this information.